Pension Issues

Pension assets can be very valuable and need to be considered carefully in the event of a divorce or dissolution of a civil partnership.

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Pension assets can be very valuable and need to be considered carefully in the event of a divorce or dissolution of a civil partnership.

This is particularly true where there is a significant disparity between the parties’ respective pension assets.

There are several ways in which the value of pension assets is taken into account when resolving financial matters on divorce and the options in each case will depend in part on the type of pension. Types of pension include:

  • A defined benefit scheme (sometimes called a final salary scheme) providing a pension income based on how much the pension-holder earned on retirement or on a career average of their earnings;
  • A defined contribution pension where the pension depends on the amount paid in and how the underlying investments perform; and
  • A self-invested personal pension (SIPP) which is frequently invested in commercial property.

An individual’s age and other circumstances are also highly relevant.  With longer life expectancies and societal changes, there are increasing numbers of couples separating after retirement.  The rules in these circumstances for sharing pensions differ and, particularly as older parties may no longer have an earning capacity, it is very important that the pension assets are dealt with carefully.

In summary outline terms, there are the following options for dividing pension assets:

  • Pension sharing whereby a pension is divided so the recipient receives a percentage share of the pension-holder’s pension, normally by way of a transfer out of the original pension scheme, to be invested in a separate pension;
  • Pension attachment whereby the recipient is paid some of the pension-holder’s pension, whether in the form of income, lump sum or both, when the pension-holder actually receives it. There are risks associated with this approach which makes it appropriate only in certain restricted circumstances; and
  • Offsetting whereby each party keeps his or her own pension assets but any difference in their value is reflected in the overall division of the family’s assets by offsetting against other assets such as property or investments. This approach can be difficult given the different bases for valuing different assets.

It is imperative in the first instance to obtain the value of each pension and consider the rules underlying each pension scheme.  In the context of divorce, the valuation methodology used is generally ‘cash equivalent’.

Where pension assets are very valuable or the pension instruments are particularly complex, it may be that expert advice is required from an actuary or accountant who specialises in such complex matrimonial cases and we are experienced at instructing such experts.

We are experienced in the recent changes concerning the way pensions are governed and the greater freedom which is now afforded to individuals in terms of their pension assets which makes for a challenging environment.  The pensions industry in this country is amongst the most complex worldwide.  Hughes Fowler Carruthers is recognised as expert in this area and Pauline Fowler chairs Resolution’s Property Tax and Pensions committee.